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Variable life can save you money on your taxes.  The Basics . . .it is a GOOD THING Nobody likes to think about insurance. Nobody likes to think about dentistry, either, but--like getting your teeth checked--or, for that matter, an annual physical--early action pays off.
We're not talking about house insurance, either. You pay a relatively small premium against the chance that the house burns down. This kind of insurance is called "property-casualty." It's to cover disaster, and your own loss. LIFE insurance is something else. It doesn't go to you, if the insurance is on you. It goes to somebody, or something, that you care about. In the nineteenth century, when wives worked only at home, life insurance was supposed to keep the family going if something happened to the breadwinner.
Still, why should we care? If you buy just what insurance you need, year by year, that is term insurance, and it's relatively low cost--and very competitive, like automobile insurance. With whole or universal life--you build up an investment underneath the insurance policy. The insurance companies haven't been blind to the big bull market. 80% of life policies sold are now variable life. When you sign up, you pick from a menu of mutual funds. If your mutual funds go up, they push up the value of the death benefit. So you get a tax-deferred buildup, just like an IRA. (More like a Roth, since you don't get a deduction for the contribution). And there are tax benefits on the payout, as well. The "variable"in the policy means that the amount paid out will be variable, according to the investments you have chosen. Estate planners use variable life because, by gifting the insurance policy to a trustee(for the benefit of children or whomever you name)it's also possible to bypass estate taxes. The life policy, which was, many years ago, considered a big asset for a working man, is now most often the "wrap"around the investments that gives it a tax preference! The IRA began because we have a social convention that says Saving is a GOOD THING, even though we don't officially save very much. The Life Insurance industry prospered because we have a social convention that says Life Insurance is a GOOD THING. Whenever there is a social contract like this, the lawmakers pass tax breaks, and it is the tax breaks that make the boring old life insurance policy worth paying attention to. Here's an example: Mr. and Mrs. Tom Jones own a toy store . They both work in it. Their children, Charlie and Jane, worked there some weekends when they were in high school, but stopped when they went to college. Now Charlie has gone to work in a bank and Jane, a designer, got married and had a baby, though she is thinking about going back to work. The Tom Joneses do not think of themselves as rich. But if they died, their estates might well be worth the $1.3 million of exemption granted under the tax laws. That is, the mortgage on their house is almost gone, and the house is worth probably $700,000. They have a fishing cabin at the lake, and while it didn't cost much, it is on the lake and would probably net at least $150,000--maybe more. And the toy store, they think, should bring more than $600,000. And they have some securities and mutual funds. They would like to leave their estate to Charlie and Jane and whatever children they have, and at this level, estate taxes would take 55 cents of each dollar and the rates rise from there. By buying a single premium variable life policy, they can cut the effect of taxes. Here is a plan told to them by an insurance agent. They name a trustee for Charlie and Jane. They haven't decided yet whether it's their local lawyer, who is drawing up the trust, or a friend, or the bank. They can designate half a dozen mutual funds to go into the trust--and "wrap" them with a life insurance policy. "Wrap" is simply the term used in talking about an insurance contract. The contract says the insurance company will pay the basic level of insurance--PLUS what the funds are selling for in the market when the time comes to pay themout. So the policy is a VARIABLE life policy--the amount paid out varies according to the value of the funds. The Jonese can swap around among funds twelve times a year--can sell aggressive growth and go into money markets, or sell money markets and go into growth.  
SHOULD THE JONES DO THIS? Questions & Answers Question: Can I put any mutual fund into a life policy? Question: When should I start to care about life insurance? Question: Any other reasons? Question: You mean Bill Gates could beat inheritance taxes on $100 billion?
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Let's see what we're NOT talking about
here. We're not talking about car
insurance. You get car insurance because
your state requires liability insurance---if
you hit somebody (hopefully never) the
bills have to be paid. You might have
insurance on your own car to help with the
repairs if you're unlucky.
So there grew up a social contract that said, Life Insurance is a GOOD THING.
Consequently, even after nearly a century of the income tax, the proceeds of Life
Insurance are tax free. Uncle Sam wants you to have life insurance.
